Pre-SCN Consultation in GST: A Path to Smoother Dispute Resolution?

Tax disputes typically begin with the issuance of a show-cause notice (SCN), a formal notification by tax authorities to the taxpayer, alleging non-compliance and outlining the basis for the proposed action. This process often leads to prolonged litigation, resulting in significant costs and time for both parties. To address this challenge, the Central Board of Indirect Taxes and Customs (CBIC) introduced the concept of pre-SCN consultation in 2015, applicable to cases involving substantial tax demands exceeding Rs. 50 lakhs.

Pre-SCN consultation aims to foster dialogue between the taxpayer and the authorities, enabling both sides to discuss facts, clarify legal interpretations, and potentially resolve disputes without escalating to formal proceedings. This approach aligns with broader objectives such as promoting voluntary compliance, reducing administrative burdens, and facilitating trade.

Although pre-SCN consultation has been formalized through CBIC instructions and circulars, these are not explicitly included in the GST Act. However, Rule 142(A) of the GST Rules does provide a reference to pre-SCN consultation, offering some statutory basis for its implementation.

This article critically examines the role of pre-SCN consultation in the GST regime, assesses its effectiveness and evaluates its practical challenges in achieving its intended objectives of minimizing disputes and fostering a taxpayer-friendly compliance environment.

Historical Context and Implementation

Understanding the background of the pre-SCN consultation is essential to appreciate its purpose and implementation. The first report of the Tax Administration Reform Commission (TARC) recommended the introduction of a pre-dispute consultation mechanism to avoid unnecessary disputes. TARC emphasized:

“It is desirable to avoid disputes where a collaborative approach can provide a solution. An administrative pre-dispute consultation mechanism may be instituted in both the organizations for resolving tax disputes at the pre-notice stage through an open dialogue with the taxpayer, in which both sides articulate and discuss their respective positions and views on the matter at hand. An amicable resolution would be possible when a common view emerges on the facts and the legal position. It is expected that this process, if followed in proper spirit, would lead to elimination of a large number disputes leaving only a few contentious matters in which mutual agreement is not reached. Such disputes would follow other legal channels.”

TARC also recommended that tax officers should refrain from resorting to coercive recovery actions during the consultation process. It further suggested that only officers authorized to issue SCNs should participate in these consultations. These officers were advised to adopt an open and receptive attitude, giving due consideration to the taxpayer’s perspective before formulating their views. The purpose of this exercise was to narrow down the issues, ensuring the SCN addressed only unresolved matters. Moreover, points agreed upon during the consultation were to be considered final and not contested further by either party.

These recommendations were adopted, and the Central Board of Excise and Customs (CBEC) issued Master Circular No. 1053/02/2017-CX on March 10, 2017. Paragraph 5.0 of the circular states that:

“5.0 Consultation with the noticee before issue of Show Cause Notice: Board has made pre-show cause notice consultation by the Principal Commissioner/Commissioner prior to issue of show cause notice in cases involving demands of duty above Rs.50 lakhs (except for preventive/offence related SCNs) mandatory vide instruction issued from F No. 1080/09/ DLA/MISC/15, dated 21st December, 2015. Such consultation shall be done by the adjudicating authority with the assessee concerned. This is an important step towards trade facilitation and promoting voluntary compliance and to reduce the necessity of issuing show cause notice.”

However, while pre-SCN consultation was established through administrative circulars and instructions, it was not incorporated into the statutory framework when the CGST Act was enacted or its rules were notified. This lack of statutory backing raises questions about the uniformity and enforceability of the consultation mechanism.

High Court rulings on issuance of SCN without carrying out pre-SCN consultation

Several recent High Court rulings have highlighted the importance of pre-SCN consultation, especially when the tax authorities fail to follow the prescribed procedure.

➣  In the case of Gulati Enterprise vs Central Board of Indirect Taxes and Customs &Ors (2022(05)LCX0064), the Delhi High Court emphasized that a voluntary statement cannot substitute a statutory notice, which is contemplated under Rule 142(1A) of the 2017 Rules.

➣  Similarly, in Omaxe New Chandigarh Developers Pvt. Ltd. v. Union of India &Ors. (2021(04)LCX0002), the Delhi High Court made the following observations:

“3.3. Insofar as the captioned writ petitions are concerned, as noted above, the defence taken by the contesting respondents is that pre-show cause notice consultation had occurred and, in that context, reliance is placed upon the statements made by the petitioners’ officials [pursuant to summons issued to them], before the Senior Intelligence Officer under Section 14 of the Central Excise Act, 1944, as made applicable to Service Tax matters vide Section 83 of the Finance Act, 1994.

3.4. We are of the view that “voluntary statements” recorded before the Senior Intelligence Officer cannot constitute pre-show cause notice consultation as envisaged in the paragraph 5 of the 2017 Master Circular. Consultation entails discussion and deliberation. There is back and forth between parties concerned with the consultative process, leading to, metaphorically speaking, often, separation of wheat from the chaff.

3.5 A voluntary statement is, at best, a one-way dialogue made before an authority which often does not, as in this case, take a decision as whether or not next steps in the matter are required to be taken. It is not in dispute that the show cause notices impugned in the captioned writ petitions dated 11.04.2018 (W.P.(C) 12653/2019) & 24.04.2018 W.P.(C) 5407/2020 Page 8 of 8 (W.P.(C) 7842/2020) were issued by an officer of the rank of Additional Director General. Therefore, it cannot be said that voluntary statements made by the officials of the petitioners before the Senior Intelligence Officer would constitute a pre-show cause notice consultation, as stipulated under paragraph 5 of the 2017 Master Circular.”

➣  Similarly, in the case of Amadeus India Pvt. Ltd. Vs Principal Commissioner, Central Excise, Service Tax and Central Tax (2019(05)LCX0141), the High Court remanded the matter back the file of the adjudicating authority for a fresh conduct of proceedings. However, the High Court has made an important observation on the words ‘Preventive’ and ‘Offence Related’. The Court has opined that the mere possibility that at the end of the adjudication process, the taxpayers may have to face consequences for having committed an “offence” under Finance Act, 1994 need not per se render the SCN itself as an “offence related” SCN. If that were to be the logic, then in every case para 5.0 of the Master Circular can be dispensed with on the ground that the adjudication of the SCN is likely to be lead to the noticee facing proceedings for having committed an offence. The exception would then become the rule and not vice versa, and the need for any pre-notice consultation being rendered redundant. Further, without the conclusion of the adjudication on the SCN, the contesting Respondent would not be able to decide whether an offence is made out. The Court is satisfied that it was necessary in terms of para 5.0 of the Master Circular for the Respondent to have engaged with the Petitioner in a pre-SCN consultation, particularly, since in the considered view of the Court neither of the exceptions specified in para 5.0 were attracted in the present case. Therefore the Court sets aside the impugned SCN dated 4th September, 2018 and relegates the parties to the stage prior to issuance of impugned SCN.

➣ In Back Office IT Solutions Private Limited Vs Union of India & Ors [W.P.(C) 5766/2019 & CM APPL. 25101/2019] vide order dated 05-04-2021, the Delhi High Court was of the view that the contesting respondents were mandatorily required to have a pre-show cause notice consultation with the petitioner-company and that having not being done in the instant matter, the proceedings initiated by the contesting respondents via the impugned show cause notice are non-est in law.

These rulings illustrate that pre-SCN consultation was treated as a mandatory step in the pre-GST regime, with High Courts consistently quashing SCNs issued without following this process. This raises important questions about the role of pre-SCN consultation in the GST era, including whether it remains mandatory or has become discretionary.

Pre-SCN Consultation under GST: Mandatory vs. Discretionary

The issuance of show-cause notices (SCNs), tax demands, and recovery procedures under the GST framework is governed by Rule 142 of the CGST Rules. In an effort to promote transparency and compliance, the Central Board of Indirect Taxes and Customs (CBIC) introduced sub-rule (1A) through its Notification No. 49/2019 - Central Tax dated October 9, 2019. This amendment made pre-notice consultation a mandatory step before issuing an SCN. The provision explicitly stated:

“(1A) The proper officer shall, before service of notice to the person chargeable with tax, interest and penalty, under sub-section (1) of Section 73 or sub-section (1) of Section 74, as the case may be, shall communicate the details of any tax, interest and penalty as ascertained by the said officer, in Part A of Form GST DRC-01A.”

This mandate provided taxpayers with a formal opportunity to review, respond to, or rectify any discrepancies identified by the tax authorities before an SCN was issued. The primary objective was to encourage voluntary compliance and reduce unnecessary litigation by resolving disputes at an early stage.

However, the natures of this requirement changed with the CGST (Twelfth Amendment) Rules, 2020, vide Notification No. 79/2020 - Central Tax dated 15th October, 2020. The amendment revised sub-rule (1A) by substituting the word ‘shall’ with ‘may’, making the pre-notice consultation optional. The revised provision now reads:

“(1A) The proper officer may, before service of notice to the person chargeable with tax, interest and penalty, under sub-section (1) of Section 73 or sub-section (1) of Section 74, as the case may be, communicate the details of any tax, interest and penalty as ascertained by the said officer, in Part A of Form GST DRC-01A.”

Although the term 'pre-SCN consultation' is not explicitly mentioned in the GST rules, the earlier circular set a threshold for such consultations, applying them only to cases where the demand exceeded Rs. 50 lakhs. In GST, sub-rule (1A) of Rule 142 initially mandated that the proper officer communicate any discrepancies before issuing an SCN, irrespective of the amount involved in the case. This was intended to provide taxpayers with an opportunity to address or clarify issues before formal proceedings. However, with the amendment to the rules on October 15, 2020, the requirement shifted from being mandatory to discretionary. The amended sub-rule now allows the proper officer to decide, at their discretion, whether to communicate the discrepancies before issuing the SCN or to directly issue the SCN.

This change means that the decision to engage in pre-SCN communication is now based on the judgment of the proper officer, which can vary depending on the facts, circumstances, and the amount involved in each case. This shift raises important questions about the consistency and fairness of the process, potentially affecting the resolution of disputes under the GST framework.

In practice, it is the decision of the proper officer-often the Commissioner or Principal Commissioner-who determines whether or not pre-notice consultation occurs. This discretionary element can lead to inconsistency in the application of the process, as it may depend on the officer's assessment of the case's complexity or value. Taxpayers do not have a formal right to insist on this consultation, and if they are denied, there are limited options to appeal or challenge the decision. This discretionary nature undermines the consistency of the process and could lead to arbitrary exclusions, especially in lower-value cases.

These concerns invite a comparison with other tax laws, where pre-SCN consultation is more formally structured. The following section explores how such mechanisms are implemented in other tax regimes and how they contrast with the GST framework.

Comparison with Other Tax Laws

While pre-SCN consultation in the GST framework remains discretionary, it contrasts with provisions in other tax laws, such as the Income-tax Act, 1961 ('IT Act') and the Customs Act, 1962 ('Customs Act'), where such consultation is mandatory, subject to certain exceptions.

Income Tax Act: Under Section 148A of the IT Act, inserted by the Finance Act, 2021, the assessing officer ('AO') is required to conduct a preliminary inquiry and provide the assessee with an opportunity to be heard before issuing a notice under Section 148. If the AO remains unconvinced by the submissions, reassessment proceedings may be initiated. However, this requirement does not apply in more serious situations, such as cases involving searches, seizures, or requisition of documents, where immediate action can be taken.

Customs Act: Similarly, under the Customs Act, the Finance Act, 2018, made pre-SCN consultation mandatory by inserting proviso to Section 28(1)(a) of the Customs Act 1962. The specific procedural details for conducting this consultation were outlined in Notification No. 29/2018-Customs (N.T.), dated 02/04/2018, which mandates that the proper officer consult with the assessee before issuing a recovery notice. The notification also provides detailed steps to ensure that the consultation is carried out effectively and within a reasonable time frame.

These examples highlight how mandatory pre-SCN consultations have been integrated into the statutory framework of other tax laws, providing a more predictable and consistent approach than the current discretionary nature of pre-SCN consultation in GST.

Practical Implications of Discretionary Consultation

Under the current framework of the Goods and Services Tax (GST), the pre-notice consultation process is governed by Rule 142(1A) of the CGST Rules. This rule initially mandated pre-SCN consultations in certain cases but was later amended to make the process discretionary. This means the tax officer has the discretion to decide whether or not to initiate a pre-notice consultation with the taxpayer before issuing a Show Cause Notice (SCN).

This shift aligns with the handling of serious cases, particularly those involving fraud, willful misstatement, or suppression of facts. In such cases, the legislature appears to believe that allowing time for discussion before issuing an SCN is unnecessary, as swift action is often needed to protect the revenue. The discretionary nature of pre-SCN consultation allows tax authorities to move forward with investigations without delay. This change helps tax authorities act quickly in serious cases, such as fraud or tax evasion, where immediate action is needed to protect revenue. The legislature believes that waiting for a consultation could delay action and complicate enforcement, which could undermine the tax system's effectiveness.

However, in cases which typically involve non-serious issues such as minor discrepancies or accidental errors in tax filings, the opportunity for pre-notice consultation is often beneficial. In these cases, a simple conversation with the taxpayer could resolve the matter quickly and avoid unnecessary litigation. The provision of such an opportunity aligns with the spirit of promoting voluntary compliance and reducing the burden on both taxpayers and the government. By not mandating pre-notice consultation in these cases, the current amendment may be viewed as misaligned with the goals of enhancing taxpayer relations and minimizing disputes. The absence of a mandatory process could also be seen as contrary to the broader goals of simplifying the tax system and minimizing the administrative burden on both taxpayers and authorities.

Therefore, while the amendment provides flexibility in handling serious cases, it may be counterproductive when applied to non-serious matters. The pre-SCN consultation process, if applied more consistently across both categories, could facilitate smoother and quicker resolutions, fostering better relations between taxpayers and tax authorities and reducing the strain on the judicial system.

Addressing Challenges in Pre-SCN Consultation

In an ideal scenario, following the Pre-SCN consultation process would benefit both the taxpayer and the government. The taxpayer would avoid lengthy procedural delays, while the revenue department could recover taxes more efficiently without resorting to issuing Show Cause Notices (SCNs) and engaging in subsequent litigation. This would have created a balanced system, benefiting both sides. Unfortunately, the reality is quite different.

Often, the consultation process is treated as a mere formality. In Dharamshil Agencies v. Union of India (2021(07)LCX0162), the Gujarat High Court pointed out that Pre-SCN consultations were conducted in an "illusionary" manner. In this case, the revenue officers issued SCNs after dismissing the taxpayer's evidence and submissions without proper consideration. Furthermore, the taxpayer was given only 14 hours' notice to attend the consultation, which the Court found to be insufficient for a meaningful engagement. The Court criticized the revenue for conducting an insubstantial and illusionary pre-notice consultation that failed to fulfil its intended objective and purpose.

Further, in a situation where we accept that the department has issued the pre-show-cause notice, the taxpayer cannot be completely relieved. In a large number of cases, this notice turns out to be bait for the taxpayers. Part B of Form GST-DRC-01A is carved out to provide the taxpayer with an opportunity to make his submissions if the taxpayer does not wholly or partly agree with the proposed liability. However, it can be noted that the tax officer, in most cases, dismisses the submissions forwarded by the taxpayer at the pre-dispute stage and eventually issues the show-cause notice. This issued notice contains the allegations the department makes; these allegations are usually repeated and reproduced from the pre-show-cause consultation stage. In this scenario, there remains no difference between the defense statement made by the innocent taxpayer at both stages of the process. Hence, the first line of defense made by the taxpayer crumbles on account of it being exposed at the pre-show-cause consultation stage; this negates the true essence of pre-show-cause notice.

Additionally, several other challenges continue to hinder the effectiveness of the Pre-SCN consultation process under GST:

These challenges highlight the disconnect between the theoretical benefits of Pre-SCN consultation and the practical implementation under the GST system.

Advantages of Pre-SCN Consultation

The pre-SCN consultation mechanism offers a range of benefits, as it enables dialogue between tax authorities and taxpayers to address discrepancies and potentially resolve disputes without escalating to litigation. When conducted with sincerity and adherence to its true intent, pre-SCN consultation provides the following advantages:

i) Enhanced Compliance: Taxpayers can understand the nature of discrepancies, prepare for tax payment or resolution, promoting timely compliance and ensuring they are not caught off guard by sudden demands.

ii) Improved Tax Recovery: Open dialogue between stakeholders often results in quicker resolution of disputes, facilitating better tax recovery and collection.

iii) Reduction in Litigation: Addressing issues during pre-SCN discussions helps avoid lengthy legal battles, saving time and resources for both taxpayers and authorities. Taxpayers are provided with detailed information regarding the issues leading to the proposed SCN, enabling them to seek professional advice at the right time.

iv) Opportunity to Clarify and Rectify: Taxpayers can present their evidence, clarify misunderstandings, and correct inadvertent mistakes, reducing the chances of unnecessary disputes and promoting transparency and fairness.

In summary, pre-SCN consultation aligns with the objectives of reducing litigation, enhancing voluntary compliance, and ensuring a more collaborative and efficient resolution of tax discrepancies. If implemented with genuine intent and transparency, it serves as a valuable tool for both taxpayers and tax authorities.

Conclusion: Strengthening Pre-SCN Consultations

In conclusion, while the pre-SCN consultation process holds great potential for minimizing tax disputes and promoting voluntary compliance, its current implementation faces several challenges. The shift from a mandatory to a discretionary approach has led to inconsistencies in its application, which could undermine its effectiveness in fostering a transparent and taxpayer-friendly environment.

Additionally, practical issues such as a lack of standard procedures, insufficient documentation, unrealistic demands, and limited taxpayer awareness continue to hinder the process. To fully realize the benefits of pre-SCN consultation, these challenges must be addressed through clearer guidelines, better enforcement, and a focus on genuine, transparent dialogue between taxpayers and authorities. Clear, well-documented notices, along with adequate response time, will help taxpayers understand the benefits of the consultation process and avoid unnecessary penalties. This collaborative approach would enhance the relationship between the tax department and taxpayers, fostering a more efficient, fair, and predictable tax system conducive to voluntary compliance.

Instead of making pre-SCN consultations entirely discretionary, the GST authorities should consider limiting the process to specific cases or those involving smaller amounts, or where it is clear that the issue at hand is unlikely to result in significant revenue loss. Introducing targeted exemptions in this manner would help align the consultation process more effectively with its intended objectives, ensuring that resources are directed toward matters that require closer scrutiny.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.